House of Representatives Committees

Chapter 3 Regulatory and Pricing Issues

Introduction

3.1The Shareholder Ministers’ Six Monthly Performance Report (the
Performance Report) provides an update of the regulatory matters facilitating
and associated with the National Broadband Network (NBN) rollout for the period
ended on 30 June 2012.

3.2These matters include an update on the binding definitive agreements
with the Telstra Corporation (Telstra) and SingTel Optus Pty Ltd (Optus), the
NBN Co Limited (NBN Co) Special Access Undertaking (SAU) and Wholesale
Broadband Agreement (WBA). In addition, general pricing issues are discussed.

Binding Definitive Agreements with Telstra and Optus

Telstra Agreement

3.3The broad terms of the Binding Definitive Agreement between the
NBN Co and Telstra (the Telstra Agreement) were outlined in the Second and
Third Reports. With the ACCC’s approval of the Telstra Structural Separation
Undertaking and accompanying draft customer migration plan, the final
conditions precedent were met and the Telstra Agreement came into force on 7
March 2012.[1]

3.4The Telstra Deal is now in its implementation stage with the following
‘key milestones’ achieved over the period covered in the Performance Report:

‘Delivery of the
Transit schedule with 142 exchanges and 99 dark fibre links handed over at the
end of June 2012.’

‘Significant work has
been undertaken in relation to Network Design Documents and detailed processes
developed.’

‘In conjunction with
Telstra, NBN Co has updated its design rules to reduce excess remediation and
to reduce the amount of augmentation required.’[2]

Optus Agreement

3.5The ACCC issued a final determination on the $800 million Binding
Definitive Agreement between the NBN Co and SingTel Optus Pty Ltd (Optus
Agreement) on 19 July 2012.[3] With the conditions
precedent to the Optus Agreement being met, the agreement came into force. The NBN
Co 2012-15 Corporate Plan now incorporates the financial impact of the Optus
Agreement.

Australian Competition and Consumer Commission Review

3.6The ACCC stated that its determination on the Optus Agreement was ‘an
extremely difficult decision’, but that it had ‘made the right decision.’[4]

3.7In making its determination in reference to the Optus Agreement, the
ACCC stated that it weighed up the benefits and the detriments of the
authorisation in regard to the impact on competition. The ACCC explained:

...we have to weigh the benefits with the detriments, under
the authorisation test. Is there a net benefit from the arrangement? Normally,
whenever a party in this situation as it were buys out its main competitor, the
detriments are enormous in terms of price competition, non-price competition
and dynamic effects from both the player that is still there and the one that
is coming, but here it is very difficult for NBN to respond, because they have
to provide a universal price and service across the country. So you lose a lot
of the dynamic response from NBN. Then, from Optus' point of view, we judged
they were not going to roll out the HFC any further. I think it really is quite
clear that, under the legislation, they have no incentive to do that. And the
amount they would need to invest to match the higher level services is
something that, again, we judged they would not do. So it is a very unusual
situation. If you look at it from Optus's point of view, one way to look at
this is: if the NBN had been rolled out as an open access network first, if
that was the first investment made, would Optus subsequently want to invest in
an HFC? I doubt they would, because this is an open access fibre network. Optus
is making those judgements all the time about whether they would compete
against something that has been overbuilt against them. It is a very unusual
situation.[5]

Access Pricing

NBN Co’s Special Access Undertaking

3.8On 5 December 2011, the NBN Co voluntarily lodged a Special Access
Undertaking (SAU)[6] with the Australian
Competition and Consumer Commission (ACCC) for review.[7]
Following receipt of the SAU, the ACCC began its legislatively required
consideration process (which includes industry consultation).[8]

3.9As a result of the ACCC’s process, and subsequent discussions with the
NBN Co, on 20 June 2012, to ‘address issues raised by Access Seekers
and the ACCC’ the NBN Co released a document containing its revised
approach to the SAU.[9]

3.10In anticipation of receiving a revised SAU and to allow the NBN Co to
develop its revised SAU approach, the ACCC suspended its consideration of the
NBN Co’s original SAU.[10]

3.11Following the release of the revised approach document, subsequent
industry feedback and ongoing discussion with the ACCC, on 7 September
2012, the NBN Co withdrew its original SAU. Withdrawal of the NBN Co SAU meant
the ACCC would not have to make a decision on the SAU by 12 September 2012 as legislatively
required.[11]

3.12The NBN Co stated in its Corporate Plan that it expected to lodge its
revised SAU with the ACCC in advance of finalisation of its Wholesale Broadband
Agreement.[12]

3.13On 28 September 2012, NBN Co Limited and NBN Tasmania Limited lodged a
revised SAU with the ACCC. The ACCC then commenced its consideration of the SAU
under the criteria set out in section 152CBD of the Competition and Consumer Act 2010 which included an
industry consultation process.[13]

3.14This process was restarted with the NBN Co’s withdrawal of the revised
SAU and the lodgment of a new SAU and accompanying documents, with the ACCC on
18 December 2012. The new SAU ‘includes amended non-price terms which NBN Co
states have arisen out of the now concluded Contract Development Process’…and…’some
other amendments which NBN Co states clarify the operation of the SAU.’[14]

3.15The ACCC was to release a draft decision on the original SAU by
mid-March 2013[15], which has now changed with
the lodgement of the second revised SAU. The ACCC is required to make its
decision on the SAU within six months of its receipt. If the ACCC has not
arrived at a decision within this timeframe, the SAU would be deemed to be
accepted.[16]

Wholesale Broadband Agreement

3.16Under the SAU, the NBN Co is required to ‘ensure that its Standard Form
of Access Agreement (including the Wholesale Broadband Agreement) remains
aligned with the SAU.’[17]

3.17The Wholesale Broadband Agreement (WBA) is a standard form of access
agreement (SFAA) or contract between a RSP which outlines ‘the complete terms
and conditions of access to all of the services and products being provided
over’ the NBN’s ‘fibre, wireless and satellite networks.’[18]

3.18Following a ten-month industry consultation and several versions of the
document on 30 November 2011, the NBN Co released its WBA.

3.19With the absence of an approved SAU, the ACCC raised concerns about the
initial five-year term of the WBA. As the SAU would set the framework under
which the WBA could be entered into, without the SAU, RSPs would not have
recourse to the ACCC if required.[19]

3.20On the ACCC’s advice and without an approved SAU, the NBN Co revised the
term of its WBA to only 12 months.

3.21As at 30 June 2012, 41 RSPs (or Access Seekers) have signed the WBA. Those
RSPs that have signed a WBA with the NBN Co constitute over 94 per cent of
market participants in the fixed broadband market.[20]

3.22In the same vein as the WBA, the NBN Co has also released the Wireless
Trial Agreement, the Interim Satellite Services Agreement, the Satellite
Wholesale Broadband Agreement and Testing Terms and Conditions all as SFAAs. Twelve
RSPs have signed onto the Interim Satellite Services Agreement and 16 RSPs have
signed the Fixed Wireless Trial Agreement.[21]

3.23On 20 June 2012, when it announced its suspension of the assessment of
the NBN Co SAU, the ACCC stated its expectation that:

...the regulatory framework established by the SAU should be
in place prior to the execution of longer term Access Agreements between NBN Co
and access seekers.[22]

3.24On 12 November 2012, with the release of its industry consultation paper
on the SAU, the ACCC reiterated that:

...it expects parties to agree to short term arrangements for
the continuing supply of NBN Co’s services until assessment of the undertaking
concludes and the regulatory framework is established.[23]

3.25The NBN Co is continuing to engage with industry:

...regarding the further enhancement of the WBA, via the
Contract Development Process (CDP) set out in the WBA itself.[24]

3.26The CDP has over the period made ‘substantial progress... in relation
to... the terms and structure of the WBA and its interaction with the SAU,
intellectual property and confidential information and an appropriate approach
to service levels including the development of service levels over time.’[25]

3.27Given the expected finalisation, lodgement and assessment of the revised
SAU, the ACCC stated ‘that NBN Co and access seekers will need to agree upon
interim contractual arrangements.’[26]

3.28In its new Corporate Plan, the NBN Co provides scope for the extension
of an interim WBA by mutual agreement between itself and an RSP.[27]
Following lodgement of the revised SAU the NBN Co ‘proposed to its customers
that current agreements be extended while the ACCC considers the revised SAU.’[28]

3.29Later, the NBN Co confirmed that the current WBA has been extended until
the earlier of either 30 April 2013 or a month after the SAU is accepted. The
NBN Co stated:

The majority of customers have now extended the current WBA,
until the earlier of 30 April 2013 or a month after the SAU is accepted. Only a
couple of customers are yet to return the extension documentation to NBN Co,
but are expected to do so shortly.[29]

3.30The NBN Co also stated that the final WBA is expected to be finalised by
the end of November 2012 and will be made available to NBN Co customers when
the SAU has been accepted. The final WBA will have a two-year term. The NBN Co
stated:

NBN Co is planning to finalise its next Wholesale Broadband
Agreement (WBA) at the end of November 2012. The next WBA will be available for
execution by customers when the Special Access Undertaking (SAU) has been
accepted, and will have a term of 2 years. Having the next WBA finalised
shortly will give NBN Co and its customers certainty to prepare for its
implementation, and also facilitate the SAU assessment process (as the SAU,
once accepted, and the next WBA will operate together).[30]

Impact of Access Price

3.31The impact of the CVC[31] price (or access pricing
for RSPs) on the retail prices offered for broadband consumers (or end users) has
been raised as an issue since the committee’s First Review.

3.33The NBN Co 2012-2015 Corporate Plan also states that the NBN Co expects ‘to
reduce CVC prices as traffic across the network increases over time.’[33]
However, the NBN Co stated that it cannot prevent any price rises being
directly passed onto the consumer. The NBN Co stated:

We deal with wholesale prices. We have agreed in the SAU that
we are holding prices fixed for the first five years of the SAU, but we cannot
make any guarantees. But we are expecting the market to operate at the retail
level....We will drive wholesale prices down.[34]

3.34The ACCC commented that the price of the CVC charge should fall over
time, but that NBN Co’s revenue (from CVC pricing) may still increase. The ACCC
explained:

It is a very live issue what the trend rates are going to be
in the CVC charges over the life of the SAU. NBN Co has recently said it
accepts that the price per unit of CVC charges should come down over time. That
does not mean that revenues cannot increase because you get more for less,
basically, or more for more but at a lower price per unit. What those CVC
charges end up at and what the trend rate over time is will be relevant to the
margin for retailers in the provision of services.[35]

3.35In relation to CVC pricing, as part of its consideration of the NBN Co
SAU, the ACCC is seeking consumer and industry views on:

The commitments around NBN Co’s proposed ‘usage’ based charge
(the ‘connectivity virtual circuit), and in particular its implications for how
NBN Co’s customers and end-users take up services and for NBN Co’s ability to
recover the costs of its investments.[36]

3.36Further, the ACCC has stated that it:

... will consider whether more binding pricing commitments to
lower the usage based charge are required.[37]

Concluding Comments

Optus Agreement

3.37The committee acknowledges the evidence it received from the ACCC on its
analysis and acceptance of the Optus Agreement.

NBN Co’s Special Access Undertaking

3.38The NBN Co has revised and relodged its original SAU in response to
industry feedback and ongoing negotiation with the ACCC. The committee
understands that the ACCC is currently reviewing the revised NBN Co SAU and is
expected to finalise its consideration of the undertaking within six months of
its receipt.

3.39In the meantime, the NBN Co has proposed to RSPs that the interim WBA
agreements be extended. With the release of its NBN Co SAU consultation paper,
the ACCC has also reiterated its expectation that this approach be taken by the
NBN Co.

3.40The NBN Co has stated that it has already extended its WBA with the
‘majority of customers’ until the earlier of either 30 April 2013 or a month
after the SAU is accepted. The remaining few who are yet to return the
extension documentation ‘are expected to do so shortly.’

Impact of Access Price

3.41The committee acknowledges that the NBN Co is holding prices fixed for
the first five years of the SAU, will drive wholesale prices down, but that it
cannot make any price guarantees at the retail service level. The ACCC
explained how the CVC price is likely to fall over time. While the CVC is a
determinant of the retail price offered by RSPs, and taking into consideration
the comments made by the NBN Co, it remains to be seen whether competition at
the retail level will provide lower prices for consumers into the longer term.
The committee believes the NBN Co and the Government have a responsibility to
ensure that high speed broadband is affordable for all consumers.